How to finance your company’s growth projects
2 minutes read
You’ve got big plans to expand your small business. Say you’d like to buy a new delivery truck, hire a sales representative or move into a bigger office.
Your plans will cost money—so how will you pay for them?
Many entrepreneurs make the mistake of paying for growth projects out of everyday cash, instead of using small business financing.
Unexpected cash flow stress
That can put a lot of stress on your cash flow. Even if you’ve got healthy profits and plenty of cash on hand right now, what happens if you hit an unexpected speed bump and your revenue dries up for a while?
With your money tied up in long-term assets, you could wind up with a sudden cash flow squeeze.
At that point, it could be too late to approach a bank for emergency cash. Bankers aren’t likely to risk making a small business loan to a company with tight finances. And it won’t help that you’ve shown poor planning.
Growing companies at risk
A surprising number of profitable companies wind up being forced to close their doors in just such circumstances.
The risk is especially high for growing businesses. They tend to have higher accounts payable and receivable and greater sums tied up in inventory and other assets. Revenue gains may not match the extra cash outflows as they ramp up the business.
The key, financial experts say, is to match the type of financing to the type of expenditure you are making. Everyday sources of cash such as working capital or a line of credit are appropriate for short-term or recurring expenditures such as utilities, office supplies or payroll.
Match financing to the asset
But when purchasing longer-term assets, it’s often better to seek a small business loan whose repayment terms match the asset’s expected lifespan. For example, a delivery truck with a multi-year lifespan should be financed with a multi-year term loan.
Other financing tips:
- Work out your financing needs ahead of time. Plan your growth projects at the start of each year—so you can approach your bank beforehand and arrange the best possible terms. Going to your bank in advance also shows good management.
- When considering a small business loan, don’t just think about the interest rate. The terms can be just as important. What administrative fees will you be charged? Can you defer principal repayments for an initial period? How much security does the bank need? How long is the amortization period? Flexible terms can free up more cash for your business.
- Having a financial plan in hand will help persuade your bankers to provide a loan. It should spell out what the money will be used for; when it will be needed; and how it will be repaid.